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Changes to CPF investment Scheme (CPFIS) and how does it benefit you?

Lower initial investment charges would results in higher potential gain for investors using CPF funds

Announced on 5th March 2020 by Second Manpower Minister Josephine Teo, CPFIS investment charges of up to 3% will be gradually phased out: The maximum cap will be at 1.5% from 1st October 2020, and completely removed by October 2020.

Yearly wrap account which allows the investors to switch between unit trust funds will see a reduction in fees as well. The wrap account maximum fees of up to 1% will be adjusted to 0.7% from 1st October 2020, and 0.4% by October 2020.

How much are you getting on your CPF account now?

We start with a quick guide on CPFOA, CPFSA and SRS account to put everyone on the same page and clear any doubts at the same time.

The first S$60,000 combined funds in your CPFOA, CPFSA and Medisave Account currently earn an additional 1% p.a. bonus rate.

  • CPFOA – Base interest 2.5% p.a, up to the first S$20,000 earns an additional 1% p.a
  • CPFSA and Medisave account – Base interest 4% p.a, the remaining balance of up to S$40,000 earns additional 1% p.a

Interest rates on CPF accounts are reviewed by CPF board on a quarterly basis. CPF-OA account earns the higher of the legislated minimum interest of 2.5% p.a or the 3-month average of major local banks’ interest rates.

What is Central Provident Fund Investment Scheme (CPFIS) all about?

Under the current CPF ruling, CPFOA balances above S$20,000 and CPFSA balances above S$40,000 can be used for investment into CPFIS approved funds (Click here for the list).

The purpose of CPFIS is to allow  CPF account holder to potentially generate higher returns on their funds. This allows a higher lump sum withdrawal at retirement age or a higher monthly income during retirement.

Having said that, higher returns come with higher price volatility compared to the base interest rate offered by CPF board.

How do the changes benefit investments into CPFIS?

We list the benefits to individuals investing their CPFIS approved unit trust fund under the new ruling:

Lower initial sales charges (Subscription fees)

Currently, financial advisors and insurance agents can charge up to a maximum initial 3% fee on CPFIS approved funds or ILP funds. Assuming a lump sum investment of S$50,000,

  • CurrentUp to 3% or S$1,500 of the invested amount goes towards fees and commission (Balance of S$48,500 goes to the invested CPFIS fund)
  • 1st Oct 2020Up to 1.5% or S$750 of the invested amount goes towards fees and commission (Balance of S$49,250 goes to the invested CPFIS fund)
  • 1st Oct 20200% initial charges, the full amount of S$50,000 goes to the invested CPFIS fund

For consumer/ investor, this allows potentially higher financial returns. The reason being that the full invested funds are generating investment returns, instead of starting at a lower invested amount.

This also has the additional effect of discouraging “churning” by advisors to earn commission, by reducing fees payable by clients.

For the advisor, lesser upfront fees and commission means additional effort and regular updates to retain clients to justify earning trailer fees.

Lower yearly wrap fee (Recurring)

The current maximum wrap fee chargeable stands at 1% yearly. Assuming the value of an investment portfolio stays constant at S$100,000,

  • CurrentUp to 1% yearly (S$1,000 gets deducted from the investment portfolio as fees to the platforms and advisor)
  • 1st Oct 2020Up to 0.7% yearly (S$700 gets deducted from the investment portfolio as fees to the platforms and advisor)
  • 1st Oct 2020Up to 0.4% yearly (S$400 get deducted from the investment portfolio as fees to the platforms and advisor)

For consumer/ investor, this allows potentially higher financial returns. The reason being that lesser charges are incurred on a yearly basis on their portfolio. Hence, the value of the investment portfolio can generate a higher rate of financial returns.

For the advisor, the lowered fees would certainly result in higher competition on servicing to retain and acquire client base.

CPFIS Investment Linked Policies (ILPs)

Investment Linked Policies can be purchased via cash (Lump sum or regular premium) or CPF (Lump sum).  Currently, all ILPs offered by insurance companies comes with layers of fees and charges.

  • Regular premium ILPs using cash can and usually offers insurance coverages and protection, hence justifying higher charges for the coverages provided.
  • Lump sum CPFIS using ILPs offers coverage at the bare minimum, providing coverage usually 5% on top of the investment amount in the event of death.

As such, it is hard to justify a high charge of 3% for CPFIS ILPs. With the reduction in fees, such scheme will be more attractive to the policyholders.

Note: The opinion by the contributor stands that direct investment without the wrapper fees of an investment-linked policy benefits the client the most.

Read about: Investment Linked Policies: How does it work?

Other CPFIS changes (No direct financial impact)

The application or opening of a CPF investment account now comes with a mandatory Self-Awareness Questionnaire (SAQ). The purpose of the SAQ is to assess the financial understanding and knowledge of the individuals that wish to invest their CPF funds.

This allows the potential investor to know his risk appetite and whether the associated risks involved in the investment are suitable based on an individual profile.

CPF investment for CPFOA  and CPFSA can be open via DBS/POSB, UOB and OCBC

Why not make just all investment completely free of charges?

Your financial advisor(s) are regulated by MAS and are unlikely to hold other paying jobs. Supposedly all fees and charges are void, it will result in no fees or commission earned.

Sadly, we do believe that any job requiring full work commitment should be offered some form of remuneration or a source of income.

Read about: 5 other ways you can use your CPF before retirement

Read about: Unit Trust Funds or ETFs (Which is suitable for you)

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